Montgomery County, Maryland

FINANCIAL ANALYSIS
AND SWOT FINDINGS

RENTAL HOUSING STUDY

August 24, 2016

Presented by:
Kyle Talente, RKG Associates, Inc.
Dr. Lisa Sturtevant, Lisa Sturtevant & Associates, LLC

PROJECT OVERVIEW
Task 1: Project Kickoff/
Data Collection

Task 2: Secondary
Analysis

Task 3: Narrow Options

Task 4:
Recommendations

Identify Data Needs

Identify Key Stakeholders
Review Background Materials
Focus Groups and Stakeholder Interviews
Neighborhood Assessment
Local and State Policy Analysis
Best Practices Analysis
Identify Options
Financial Feasibility Model
Cost/Benefit Assessment
Develop Recommendations
Draft Final Report
Meet with Advisory Committee, Planning Board, County
Executive and County Council

PRESENTATION OVERVIEW
SWOT Analysis
Market
Policy
Capacity

Key Policy Considerations

Produce New Housing
Preserve Existing Housing
Generate Resources

Financial Analysis
Methodology
Results
Implications
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SWOT ANALYSIS

STRENGTHS
Market
Local and regional market demand strong at all incomes
Data indicate households continue to seek MC opportunities
Most profitable along Metro, Purple line, and within ICC
Best serving 60% to 80% right now

Certain areas have broader appeal

Metro corridors, inner subareas, well regarded elementary schools
Also tied to available amenities

Substantial supply of traditional ownership (single -family) units

augments rental market (large units)

STRENGTHS
Policy
MPDU program very effective at delivering units
Focused in the 50% to 70% range only

MPDU program has distributed the price controlled housing

throughout the County
CR zoning has a reward system for additional MPDU production
Right of first refusal program for sale of multifamily developments
Code enforcement responsive in addressing resident concerns
Housing trust fund (HIF) to incent price appropriate housing
Use of County-owned land to develop income controlled housing
Co-location

STRENGTHS
Capacity
Leadership proactively seeking to enhance price appropriate rental
housing
Elected officials, planning board, advocates

HOC is a stable, well positioned implementation partner

DHCA helpful and proactive in going through the MPDU approval
process
Still has many requirements to be met

Committed, experienced non-profit affordable housing

development partners in the region

WEAKNESSES
Market
Imbalance of supply and demand pushing rents higher
Continued increase in rents
Not enough rental housing for households earning less than $50,000

Many of the more cost effective areas do not have the amenities or
transportation support demanded
Limited land availability for development
Redevelopment costly
Placing developable parcels in to Ag Reserve reduces supply

In older buildings, renovation costs start to be comparable to

redevelopment
Building efficiency/competitiveness

WEAKNESSES
Market (cont.)
Not enough large 3+ bedroom large unit housing to accommodate
families
Not enough housing built to accommodate special needs persons
Physical/mental disabilities
Homeless/transitioning households
Not enough on-site services at existing facilities

WEAKNESSES
Policy
CR Zoning includes affordable housing in menu of benefits but
developers not required to choose that benefit
More cost effective to avoid housing option

Lack of flexibility in MPDU program delivery (e.g., limited off -site

units)
Housing one of several priorities in Montgomery County
County policies focused on regulating to stop something, not
encourage something
Certain County spending priorities determined ad hoc (HIF)
Can change with staffing change/political will

The time from project initiation to opening can take too long
Entitlement risk; construction risk; market risk

County impact fees/taxes on new development onerous to providing

affordable housing
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WEAKNESSES
Policy (cont.)
There is a perception that approval process/requirements are
inconsistent and inconsistently applied
Unpredictability = cost
Process needs to be constantly improved to be as consistent and
predictable as possible

Timeline for approvals is perceived as too long

Similar to other DMV communities

Montgomery County non-competitive with other regions in state

for LIHTC funds
Entrenched position to keep doing things the same way

11

WEAKNESSES
Capacity
Not enough money/resources being put to meet local needs
(region-wide)
Cost of development is a barrier to entry for smaller developers
Limited number of affordable housing developers to partner with

12

OPPORTUNITIES
Market
Tap into the value of excess public land
Right of way land not needed for transportation projects
Co-locating public services with rental housing development

Preservation of existing units is more cost effective in certain

markets
Preservation does not necessarily mean keep the exact unit
Incentivize redevelopment that keeps same number of affordable units
or total bedroom count

Retrofit older commercial corridors with mixed use development

Recapture development potential of parking fields
Metro areas in particular

Use of micro units in transit areas

13

OPPORTUNITIES
Policy
Flexibility in meeting County MPDU requirements
Provide lower MPDU percentage for units meeting lower income
targets
Make MPDU requirement on square footage rather than unit count
Allow for off-site unit delivery
Create distance requirement for proximity

Payment in lieu of units

Has to be at market rate value, though

Increase density and height allowances in certain areas to enable

additional supply
Increase use (funding) of right of first refusal
Tier priority for preservation based on set of criteria
Serve vulnerable populations?
Already receive Federal funding?
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OPPORTUNITIES
Policy (cont.)
Use public land for price appropriate housing development
Ag Reserve property swaps

Continue to work towards creating more predictable and efficient

development approval process
Metric-based requirements
Administrative approvals for smaller projects

Modify waiver of impact fees for more MPDUs

Adjustment of % requirement
Same flexibility in terms of income target

Create County voucher program to augment Federal program

Lobby state government to allocate LIHTC pool for Montgomery
and Prince Georges County
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OPPORTUNITIES
Policy (cont.)
Tie access to certain funds for development/rehabilitation that
incorporates accessible units

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OPPORTUNITIES
Capacity
Increase investment in Housing Investment Fund
Mandate HIF for construction/preservation only
Require HIF contribution for commercial/residential projects

Regional housing program to attract Federal/foundation support

Local communities control their own money

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THREATS
Market
Portion of resident base that opposes multifamily and/or increased
density development
Locating new developments away from services and transportation
access (value to lower-income HHs)
Purple Line displacement as redevelopment/rent increases occur
Redevelopment of existing market rate affordable properties will
reduce 3+ bedroom supply
Unless policy change in delivery of MPDU units

Reversion of rented single family units back into ownership will

impact supply-demand balance
Displacement of communities (particularly ethnic communities)
that disrupt social networks
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THREATS
Market (cont.)
Key renter market segments have different needs
County demographics are changing

Housing affordability challenges include credit worthiness, not just

income
Senior households with disabled adult children at risk
Caretakers for both

Transportation accessibility for extremely low income and disabled

persons

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THREATS
Policy
Off-site/in lieu development is counter to Countys history of
prioritizing mixed-income developments
Increasing inclusionary zoning requirement without offsetting
benefits could chill market
Using blanket policies may not be the most effective way to
develop/preserve housing
Should be done on case-by-case basis

Placing redevelopment restrictions on existing market rate

affordable properties disproportionately impacts owners
Have to balance tax burden on residents with investments in
programs such as housing trust fund

20

THREATS
Capacity
Lack of increase in financial funding will limit effectiveness
Equity investors only interested in A rental developments
Hard to get funding for secondary/tertiary locations

21

KEY POLICY
CONSIDERATIONS

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KEY POLICY CONSIDERATIONS

Successful local housing strategies are:
Comprehensive
Flexible
Responsive to local needs
Consistent with community goals

Greatest needs among lowest income households,

larger households
Financial resources are key but land use/zoning
policies are also essential
Changing needs means its necessary to revise
longstanding policies

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COMPREHENSIVE STRATEGY

Preserve
Existing
Housing

Produce New
Housing

Generate
Resources
24

POLICY OPPORTUNITIES FROM REVIEW

OF BEST PRACTICES
PRODUCE NEW HOUSING
Add flexibility to the MPDU program
Varying income targets and affordability requirements
Include an off-site and/or in lieu option

Key issues
Consistency with Countys mission/goals
Appropriateness in different markets
Getting the parameters right both to serve households in needs and
to avoid stalling housing activity

25

POLICY OPPORTUNITIES FROM REVIEW

OF BEST PRACTICES
PRODUCE NEW HOUSING
Increase use of density averaging and density
transfers
Expand public land program
Other potential smaller-impact interventions
ADUs
Development review process
Parking requirements

26

POLICY OPPORTUNITIES FROM REVIEW

OF BEST PRACTICES
PRESERVE EXISTING HOUSING
Key Issues
Make use of existing programs (e.g. Right of First Refusal)
Resources (see below)

Carrot and stick approaches

Tax exemption abatement
Demolition tax

Plan for preservation as part of redevelopment

27

POLICY OPPORTUNITIES FROM REVIEW

OF BEST PRACTICES
GENERATE RESOURCES
Expand access to tax credits
Need to work at the state level

Other Key Issues

Possible to expand sources of revenue for affordable housing
Commercial linkage fee, demolition tax, TIFs, developer fees

Assess who pays/what impact/political will

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FINANCIAL ANALYSIS

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FINANCIAL MODEL
Built to accomplish two primary tasks
Assess the value impact on units by changing AMI target
Difference of value for property owner

Analyze the proforma impacts of adjusting MDPU requirements

How do policy changes impact development potential?

Assumptions broken down based on availability

Subarea level (i.e. rents)
County level (i.e. interest rates)
Regional level (i.e. construction costs)

Proforma piece not complete yet

Waiting on additional market data from local operators/developers
Should be ready for September meeting

VALUE IMPACT METHODOLOGY

Measured the capitalized value of affordable units
against a similar market rate unit
Same market subarea
Same building type
Same bedroom count

Used market data to determine thresholds

Rent 2014 Rent survey
Vacancy and collection loss (VACL) REIS
Operating expenses REIS
Cap rates REIS, Capital One

Will refine results based on feedback from

development/operator community
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METHODLOGY
The model is interactive, allowing customized
parameters for various locations and types
The models inputs are unique to those parameters

SUBAREA

BUILDING MATERIAL

TYPE OF HOUSING

INTERIOR FIT OUT

AGE OF HOUSING

PARKING

32

METHODOLOGY
Every variable can be
customized based on specific
input requirements
Allows user to assess very
specific projects with realtime, specific pro forma and
cost impact results

33

ASSUMPTIONS
Some performance metrics do not change with
income limits
Vacancy and collection loss percentage
Operating expenses
Cap rate

Units operate with same costs to the developer

Construction
Operating expenses (set to market rate units)

Areas with no typology representation used

Countywide average
Variable override built into the model to customize as necessary
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CAPITALIZED VALUE MATH

N e w c o n s t r u c t i o n h i g h r i s e i n F r i e n d s h i p H e i g h t s / B e t h e s d a /W h i t e F l i n t s u b a re a
ONE BEDROOM RENTAL CALCULATIONS
30% of AMI
50% of AMI
PGI
$7,716
$12,840
VACL
$293
$488
OI
$0
$0
EGI
$7,423
$12,352
OE
$11,784
$11,784
NOI
($4,361)
$568
NOI/Unit
($4,361)
$568
Unit Value
($87,229)
$11,357
Value PSF
($159)
$21

65% of AMI
$16,692
$634
$0
$16,058
$11,784
$4,273
$4,273
$85,470
$155

80% of AMI
$20,544
$781
$0
$19,763
$11,784
$7,979
$7,979
$159,582
$290

100% of AMI
$25,680
$976
$0
$24,704
$11,784
$12,920
$12,920
$258,399
$470

Market Rate
$29,805
$1,133
$0
$28,672
$11,784
$16,888
$16,888
$337,757
$614

TWO BEDROOM RENTAL CALCULATIONS

30% of AMI
50% of AMI
PGI
$8,676
$14,448
VACL
$330
$549
OI
$0
$0
EGI
$8,346
$13,899
OE
$15,283
$15,283
NOI
($6,936)
($1,384)
NOI/Unit
($6,936)
($1,384)
Unit Value
($138,724)
($27,671)
Value PSF
($252)
($50)

65% of AMI
$18,780
$714
$0
$18,066
$15,283
$2,784
$2,784
$55,677
$101

80% of AMI
$23,117
$878
$0
$22,238
$15,283
$6,956
$6,956
$139,117
$253

100% of AMI
$28,896
$1,098
$0
$27,798
$15,283
$12,515
$12,515
$250,309
$455

Market Rate
$38,653
$1,469
$0
$37,184
$15,283
$21,901
$21,901
$438,025
$796

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NEW CONSTRUCTION, GARDEN

ROUTE 29 CORRIDOR EAST
UNIT SIZE

30% of AMI

50% of AMI

60% of AMI

65% of AMI

80% of AMI 100% of AMI

Efficiency

($159,700)

($73,500)

($30,400)

($8,700)

$27,500

$77,000

One Bedroom

($225,300)

($126,700)

($77,300)

($52,600)

$6,200

$62,800

Two Bedrooms

($272,600)

($161,600)

($105,900)

($78,200)

($4,100)

$59,500

Three Bedrooms

($342,900)

($219,400)

($157,700)

($127,800)

($34,200)

$42,600

FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT

UNIT SIZE

30% of AMI

50% of AMI

60% of AMI

65% of AMI

80% of AMI 100% of AMI

Efficiency

($251,400)

($165,300)

($122,100)

($100,400)

($35,600)

$22,900

One Bedroom

($328,500)

($229,900)

($180,500)

($155,800)

($81,600)

$2,100

Two Bedrooms

($424,000)

($313,000)

($257,400)

($229,600)

($146,200)

($35,000)

Three Bedrooms

($458,200)

($344,700)

($273,100)

($242,100)

($149,500)

($26,000)

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NEW CONSTRUCTION, HIGH RISE

ROUTE 29 CORRIDOR EAST
UNIT SIZE

30% of AMI

50% of AMI

60% of AMI

65% of AMI

80% of AMI 100% of AMI

Efficiency

($220,700)

($134,600)

($91,400)

($69,700)

($5,000)

$41,000

One Bedroom

($280,300)

($182,300)

($132,800)

($108,100)

($34,000)

$30,100

Two Bedrooms

($331,900)

($220,900)

($165,200)

($137,500)

($54,100)

$24,600

Three Bedrooms

($390,100)

($266,600)

($205,000)

($174,000)

($81,400)

$14,800

FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT

UNIT SIZE

30% of AMI

50% of AMI

60% of AMI

65% of AMI

80% of AMI 100% of AMI

Efficiency

($352,600)

($266,500)

($223,300)

($201,600)

($136,800)

($50,400)

One Bedroom

($425,000)

($326,400)

($277,000)

($252,300)

($178,200)

($79,400)

Two Bedrooms

($576,700)

($465,700)

($410,100)

($382,300)

($298,900)

($187,700)

Three Bedrooms

($900,200)

($776,700)

($715,000)

($684,100)

($591,500)

($468,000)

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IMPLICATIONS
Subarea, development type and bedroom count each
influence the potential cost of affordability
VALUE DIFFERENTIAL BETWEEN MARKET AND MPDU
Efficiency

1-Bedroom

2-Bedroom

3-Bedroom

Garden, Low End

($8,700)

($52,600)

($78,200)

($126,800)

Garden, High End

($100,400)

($155,800)

($229,600)

($242,100)

High Rise, Low End

($69,700)

($108,100)

($137,500)

($174,000)

High Rise, High End

($201,600)

($252,300)

($382,300)

($684,100)
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IMPLICATIONS
Location has the greatest impact on value differential
Highest along Metro Corridors and inside the ICC
Where demand is the greatest

Lower affordability level = larger value loss

$150,000 to $230,000 per unit for 30% of AMI (from MPDU)

Gap for garden apartments lower due to lower rent

threshold numbers
Owners in certain parts of the market not interested in selling to
garden density since land price is based on total unit count
Capitalizing on higher development densities

Denying density likely will result in suppressing development or

encouraging move to low density ownership housing
39

IMPLICATIONS
Attaining deeper subsidies in high cost areas requires
less tradeoff of units
Value loss the same in all areas due to the fixed price
However, amount of value loss from market varies
$70,000 in Route 29; $202,000 in FH/B/WF

So, trade off from 65% to 30% is 3:1 in Route 29; 2:1 in FH/B/WF

Actual trade-off varies by subarea, development type

Type of development impacts the tradeoff ratio
High rise vs garden

It is better to buy-down cost in some areas and trade

unit totals in others
40

SO WHAT?
Net Present Value of 1-Bedroom Unit in a new
construction high rise within FH/B/WF (10% return)
$28,700 at market rate rent
($92,800) at MPDU level
($175,900) at 30% of AMI

How do we pay for 12.5% 1-bedroom units at 30% of

AMI in a high rise in the FH/B/WF subarea?
36.5% additional market rate units (density bonus)
33% reduction in impact fees for project
$83,000 cash payment FOR EACH UNIT at approval
Reduce MPDU requirement from 12.5% to 7.5%
41

REHABILITATION
Rehabilitation costs are harder to project
Costs are variable based on property condition/need
Costs reported to vary from $50 to $100+ per square foot
Can range from $30,000 to $125,000 per unit

**Waiting on AOBA data to have more solid numbers

However, cost per unit for preservation substantially

lower than new construction
Rents naturally tend lower for older properties
If acquisition is necessary

Rehabilitation costs less than new construction costs

When acquisition not necessary

Better deal in higher-cost areas (i.e. Metro corridors)

42

NEXT STEPS

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